What's love got to do with it? Two unloved investments you could profit from - and a pair of much-loved ones that look risky

Unloved investments can often prove to be the most profitable for bold investors, while those that are popular can disappoint, says Mouhammed Choukeir, chief investment officer of private banking firm Kleinwort Hambros.

Last Valentine’s Day, investors were out of love. The FTSE 100 and the S&P 500 – bellwether equity indices – were both deeply negative on the year; some believed a 2008’esque cataclysm was on the cards.

Headlines screamed 'SELL EVERYTHING'. Many complied, dumping risk assets, falling in love with government bonds and other safe-haven securities, which shot upwards.

But from Valentine’s Day 2016 to the end of the year, the FTSE 100 and the S&P 500 rallied 22 per cent and 20 per cent, respectively. Over the same period, US government bond prices plummeted, with 10-year yields jumping from about 1.5 per cent to 2.5 per cent.

Love hurts: With long-term investment decisions, love is best turned on its head

Part of the reason many investors made poor decisions is simply because, as emotive mammals, we are filled with inbuilt predilections.

We tend to give recent events – good or bad – more weight than long-term history. We feel intuitively safer in the middle of herds, comforted by the throng, but blind to if it is headed over a cliff.

We want to act on stimulus; screaming heads on television, for example, trigger an impulse to fight, to flee, to do something, anything.

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HOW THIS IS MONEY CAN HELP

All of these instincts are useful, indeed necessary, in the wild. A bear may not have been hostile all through the winter, but if it suddenly becomes so in spring, best to discount months of observed behaviour and focus on what just happened.

A herd of buffalo may be going over a cliff, but a lone calf has no chance of survival alone. A rustling of leaves behind you better be taken seriously; ignoring it has little upside, and a messy downside. And love, of course, is crucial to the survival of our species.

But when it comes to long-term investment decisions, mammalian instincts are best turned off, and love is best turned on its head.

The three important tenets investors should take to heart

Be optimistic. There are lots of causes for concern: an unprecedented populist political paradigm globally; a tremendous transition in global monetary policy. Love is hard to come by, which is precisely why our hearts are still open to risk.

Be selective. The 'rising tide' of liquidity driven asset price increases will no longer 'lift all boats'. Increasing dispersion means investors should be more discerning than in the past. We will only love those who earn it.

Be disciplined. We live in a world where events unfold very quickly and markets can move with staggering speed. It is therefore easy to want to react. Often, that emotional impulse is wrong. By focusing on indelible drivers of long term asset returns such as valuation, momentum and sentiment, the short-term movement and uncertainty can be prudently managed. Love that is mature, evolved and built on respect stands the test of time.

What's love got to do with it?

Love can lead to absurd investment irrationality.

Take, for example, the incredible tale of the mid-17th century Dutch tulip. In 1636, investors were buying single bulbs for the same price as houses.

Soon enough, prices collapsed, and tulips fell back to par with the humble onion.

The tech bubble of the late 1990s saw a new love for the internet. The result: brokenheart.com.

Just a decade ago, we believed home prices would never break our hearts by always going up, and we kept buying houses with money we did not have. It nearly ended the world as we knew it.

But it’s not just falling in love that can have disastrous consequences, but also what we overlook because we deem it unlovable, an ugly duckling.

Between 1999 and 2002, Gordon Brown, the former British Prime Minister and Chancellor of the Exchequer, sold 60 per cent of the UK’s gold reserves for a price of $3.5billion after a run of poor performance for the seemingly useless metal. But Mr Brown did not see how cheap it was compared to its history.

Or that, with an equity market beyond overvalued, gold’s defensive characteristics could prove priceless. The ugly duckling was a swan in waiting, and that gold is worth over five times that today.

How deep is your love?

The good investor should recognise that judgement can become impaired by faith in the infallibility of instinct and instead focus incessantly on an investment process centred on valuation, momentum and sentiment.

When something is unloved and cheap, it is often time to look kindly upon it.

History shows the best returns are to be harvested from undervalued and unloved positions, particularly as momentum starts to trends upwards.

Furthermore, when others are deeply in love, one should recognise the romance has probably run its course and must be most prudent.

London property: An overvalued market that is unaffordable for many of its residents

Much-loved investments to be cautious on

US EQUITIES

The US equity market has enjoyed strong returns in recent years, and expectations for earnings growth in 2017 are sky high. This rosy view combined with elevated valuations in the US makes US equities less compelling.

LONDON PROPERTY

The only way is up, that is a widely held view on an much loved asset that is sometime described as a safe haven to invest.

While prices could continue to grind higher, an overvalued market that is unaffordable for many of its residents (average house price in London costs 16 times the average salary for a Londoner), combined with potential interest hikes and increased housing supply, could see the market come under pressure.

Unloved: But financial services is one of the most attractively valued sectors globally

Unloved investments to be interested in

EUROPEAN EQUITIES

The Eurozone crisis never really went away and there is a widely held pessimistic view that geopolitical events in Europe this year could present a number of challenges for markets and the economy.

This negativity combined with sound European equity valuations and positive economic momentum makes European equities attractive.

FINANCIAL SERVICES COMPANIES

Since the financial crisis, financial services firms have been largely unloved. A number of crises in the sector in recent years coupled with increased regulation has put the banks out of favour with investors. Nonetheless, financial services is one of the most attractively valued sectors globally.

Deeply valuated companies need a catalyst to begin realising their value. The recent uptick in global economy activity and the potential for higher interest rates, led to positive price momentum in financial services. Even with that, they still offer good value opportunities.

FUND JARGON BUSTER

The investment industry's world of abbreviations...Acc: Accumulation - any income generated by the fund like dividends or interest is automatically reinvested.Inc: Income - any income generated is distributed by the fund instead of being reinvested. Dis: Distribution - any income generated is distributed by the fund instead of being reinvested. R: Retail - the fund is aimed at ordinary investors. I/Inst: Institutional - the fund is aimed at corporate investors like pension funds. A, B, M, X etc: Different fund houses use letters for different things. Check with them what they stand for. NT/No trail: Some fund houses use this name on clean funds which carry no commissions for financial advisers, supermarkets or brokers, just the fee levied by the fund manager. But other fund houses use different letters - I, D or Y, for example - so you need to find out for yourself which are clean funds. Gr: Stands for gross. GBP/£: Fund denominated in pounds. EUR: Fund denominated in euros. USD/$: Fund denominated in US dollars. Compiled with online stockbroker The Share Centre